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Power theft in New Zealand

Published by MAC on 2008-02-24

Power theft in New Zealand

24th February 2008

Full terms of the deal for subsidised hydropower, used to service New Zealand's biggest alumininum smelter, have never been revealed to the country's citizens, although the initial contract goes back to 1960. What is known is that Rio Tinto, owner of the smelter at Tiwai Point, has been receiving cheaper electricity than any other consumer, for nearly half a century.

During the same period, many citizen groups - including CAFCA (The Campaign against foreign control of Aotearoa/New Zealnd), Maoris (on whose territory and waters, the hydro scheme depends) and politicians of all hues, have campaigned to have the contract revealed and rescinded.

But Rio Tinto continues to resist.

Power hungry - low lake levels

Sunday Star-Times (New Zealand)

24th February 2008

When supplies are tight, the big smelter at Tiwai Poin becomes a heavier burden for Meridian. Tim Hunter reports.

Near-record low lake levels are hitting hard at state-owned power generator Meridian as it struggles to feed its huge contract with Tiwai Pt aluminium smelter.

The smelter, owned by multinationals Rio Tinto and Sumitomo, buys about 15% of New Zealand's electricity generated every year and is usually fed from the purpose-built hydro station at Manapouri in Fiordland.

But water levels at Lake Manapouri and its feeder lake, Te Anau, are now below minimum normal operating levels, severely restricting the station's ability to supply Tiwai Pt. Meridian must therefore source power from elsewhere at market prices.

In the current conditions, where lake levels are heading below their levels in the crisis year of 1992, market prices are significantly higher than allowed for in Meridian's smelter contract, producing a serious cash squeeze for the state-owned generator.

How much it is costing Meridian is not known, but this month average market prices in the South Island have topped $140 per megawatt hour (MWh) almost triple the contract price for Tiwai Pt. At those levels Meridian would be losing $1 million a day.

Industry sources say Meridian would be unable to secure a hedge contract at a low enough price to avoid losses on its smelter deal.

The company does have a back-up contract with Contact Energy to take power from the Clyde and Roxburgh dams, but not at discount prices. Energy data suggest that contract has not yet been invoked.

The Star-Times asked Meridian for comment but the company refused to discuss any of these issues, citing commercial confidentiality.

Rio Tinto said the contract had arrangements to respond to "extreme hydrological situations", but did not elaborate.

Manapouri has been off-line before, but this year there are complications. Energy consultant Bryan Leyland's appraisal of our current electricity supply situation is typically forthright.

"We are in deep s--- right now and we're going to be in deeper s--- in the future," he told the Star-Times. The state of our power supplies is "the worst I've seen it in 52 years".

The crisis has several causes but the biggest immediate problem in the South Island is lack of rain. Hydro lake levels are around 74% of average and tracking close to their levels in 1992, when the drought was so severe power cuts were enforced.

Worse, lake inflows are well below even 1992 and look likely to stay that way for several months. In the crucial Southern Alps catchment area, below-normal rainfall, soil moisture and stream flows are "very likely", said National Climate Centre hydrologist Alistair McKerchar. "That's about the strongest projection we ever make."

Tiwai Pt, like other smelters around the world, relies on plentiful cheap hydro power. Its contribution to the Southland economy is huge, with 787 fulltime employees and 133 local contractors.

But when power supplies get tight, some see Tiwai Pt's ravenous crucibles as a mouth to feed too many.

A typical critic is pressure group Campaign Against Foreign Control of Aotearoa, which advocates shutting Tiwai Pt to "free up that massive block of electricity for something more useful".

The scale of its demand is considerable. Its contract with Meridian is for the supply of 554 megawatts 24-hours a day, rising to 610MW at peak times.

To put that in context, Manapouri, the biggest hydro power station in New Zealand, has a capacity of 755MW. No other power station, apart from Genesis Energy's coal-fired steam turbines at Huntly, is capable on its own of producing enough power for Tiwai Pt.

Those figures also assume enough water to allow generators to operate at their normal output. As of last week, Meridian data showed Lake Manapouri's water level was below its minimum normal operating range meaning Manapouri could not generate enough power for Tiwai Pt.

For hydro power purposes, it has effectively been sucked dry.

Data from Energylink shows Manapouri was producing just over 200MW in the week ending February 17 less than half the power Meridian is obliged to deliver to the smelter. Energy had to be found elsewhere and the figures suggest the shortfall was being made up from Meridian's Waitaki hydro system the network of lakes including Tekapo, Pukaki and Benmore.

The terms of the power contract between Meridian and the smelter, a joint venture of multinational Rio Tinto Aluminium and Sumitomo Chemical Company of Japan, are not publicly known. However, Companies Office documents show the smelter paid $276m for its electricity in 2006 and similar sums in previous years. At an estimated power use of 5000-5300GWh, this suggests it is paying $52-$54 a MWh, assuming no side deals.

How cheap this looks varies from year to year. Meridian reports that in 2006/07 its average price at Benmore was $51.74/MWh, while the year before it was $97.

These are wholesale prices the actual average price to industrial customers was much higher for most of the past decade at between $61 and $91 per MWh. Commercial and residential customers paid more still typically $100 to $117/MWh.

Overall, it looks like Tiwai Pt pays less for its power than other customers almost all of the time.

The question is, could Meridian sell Manapouri's power more productively elsewhere?

Currently the answer is no.

The ability of the national grid to transmit such a large quantity of power north of Roxburgh is severely constrained. Grid operator Transpower estimates about 300MW could be contributed from Manapouri if Tiwai Pt wasn't there, and beyond that its water would have to be spilled. But the problem could be solved.

"We have the ability to reinforce those lines fairly cheaply," said Transpower's general manager of grid investment Tim George, indicating a cost of $30m-$40m.

"That would allow us to get 1000MW out.

"We are examining it."

The upgrade would take two or three years, after which Meridian would have a bigger market for its power.

The point is moot, however in October the smelter sealed a new contract with Meridian securing its power supplies out to December 2030.

Again, the terms of that contract are confidential. However, in other countries the parties are less coy.

For example, in December New York governor Eliot Spitzer announced a deal to supply 478MW of power from state-owned New York Power Authority to Alcoa, whose smelter is a major local employer.

Terms made public included Alcoa's commitment to minimum employment levels for the 30-year duration of the contract, a share of profits when aluminium prices are high, and further investment from Alcoa of $US600m in a modernisation project that will reduce greenhouse gas emissions by 70%.

The Star-Times asked Meridian whether its existing or new contracts with the smelter allowed it to share the benefits of high aluminium prices, currently close to 10-year highs, but the company refused to say.